What Is a Proprietary Trading Firm (Prop Firm)? A Complete Guide

Introduction

A Proprietary Trading Firm (Prop Firm) is a company that funds traders with its own capital, allowing them to trade without using personal funds. Instead of investing their own money, traders pass an evaluation process to prove their skills and then trade using the firm’s resources. This model provides an opportunity for skilled traders to earn profits without financial risk, making prop firms an attractive option for those looking to trade professionally.

In this article, we’ll break down how prop firms work, their benefits, potential risks, and how you can get started.

How Does a Proprietary Trading Firm Work?

Prop firms operate on a funded trading model, where traders must pass an evaluation before gaining access to firm capital. Here’s how the process typically works:

Step 1: The Evaluation Phase

To ensure only skilled traders gain access to firm capital, prop firms require traders to complete an evaluation, often called a challenge or assessment phase. The goal is to prove that you can trade profitably while following strict risk management rules.

🔹 Common evaluation rules include:
✔ Achieving a set profit target (e.g., 8-10% within a given time frame)
✔ Staying within daily and overall loss limits
✔ Following position sizing and leverage restrictions

If a trader successfully meets these criteria, they move on to the next phase—funding.

Step 2: Getting a Funded Account

Once a trader passes the evaluation, they receive a funded trading account with the firm’s capital. The size of the account can range from $10,000 to over $1 million, depending on the firm and evaluation passed.

At this stage, the trader can begin trading in real market conditions with the firm’s money. However, risk management rules still apply—traders must avoid excessive losses to maintain their funded status.

Step 3: Profit Sharing

Prop firms allow traders to keep a percentage of their trading profits, typically between 70% and 90%. The firm retains the remaining share as compensation for providing capital and infrastructure.

Example:

• A trader generates $5,000 in profits in a month.
• If the firm offers an 80/20 profit split, the trader keeps $4,000, while the firm takes $1,000.

This model benefits both parties—the firm makes money from successful traders, and traders can earn without risking personal capital.

What Are the Benefits of Using a Prop Firm?

✅ Trade with More Capital – Instead of being limited by personal funds, traders gain access to large accounts, increasing potential profits.

✅ No Personal Financial Risk – Traders do not risk their own money (aside from evaluation fees). Losses are absorbed by the firm.

✅ Professional Trading Environment – Many firms provide advanced tools, mentorship, and risk management support to funded traders.

✅ High Profit Splits – Most firms allow traders to keep 70-90% of their profits.

✅ Opportunity to Scale – As traders prove their skills, they may qualify for larger capital allocations over time.

What Are the Risks and Challenges?

⚠ Evaluation Fees Are Non-Refundable – Traders must pay a one-time evaluation fee (typically $50-$500) to attempt funding. If they fail, they must pay again to retry.

⚠ Strict Trading Rules – Prop firms impose daily loss limits, max drawdowns, and consistency requirements. Breaking these rules may result in losing the funded account.

⚠ Emotional Discipline Is Required – Many traders fail evaluations due to poor risk management, overtrading, or lack of patience.

⚠ Each Firm Has Different Policies – Some firms offer better profit splits, withdrawal options, and rules than others. It’s important to research and choose wisely.

How to Get Started with a Prop Firm

1️⃣ Choose a Prop Firm That Fits Your Trading Style

Not all prop firms are the same. Some specialize in forex, stocks, or futures, while others have different evaluation criteria. Research and select a firm that aligns with your strategy and risk tolerance.

2️⃣ Practice with a Proven Strategy

Before attempting an evaluation, traders should paper trade (simulate trading) using a structured strategy. This ensures they are confident and disciplined enough to pass the evaluation.

3️⃣ Take the Evaluation

Once ready, traders pay the evaluation fee and begin trading under the firm’s rules. Success requires:
✔ Following the firm’s risk management rules
✔ Maintaining consistency over the evaluation period
✔ Reaching the required profit target

4️⃣ Get Funded & Start Earning

Upon passing, traders receive a funded account and begin trading with the firm’s capital. Profits are split according to the firm’s terms, and traders can scale their accounts over time.

Final Thoughts: Should You Trade with a Prop Firm?

Trading with a proprietary trading firm is an excellent way for skilled traders to access larger capital, maximize their earning potential, and reduce personal financial risk. However, passing an evaluation requires discipline, risk management, and consistent execution.

If you’re serious about trading, a prop firm could be the gateway to a successful trading career—but success ultimately depends on your ability to trade within the firm’s rules and manage risk effectively.

💡 Interested in learning more? Our structured training and proprietary trading algorithm can help you prepare for and pass a prop firm evaluation. Start your journey today! 🚀